Wheat Crop to be Smaller than Expected

Published on: 08:01AM Jun 25, 2010

Wheat development in the Northern Hemisphere is not optimal. Parts of Europe have suffered from dry conditions which have impacted yield prospects, Black Sea winterkill is estimated to be higher than average and spring wheat plantings in Canada have been significantly delayed due to excessive moisture levels in May and early June. Furthermore, early harvest results in the U.S. hard red winter belt have provided poor protein results thus far and shortages of high-quality, high-protein milling wheat are now threatening for the season ahead, according to Luke Chandler, commodity analyst with Rabobank.
“USDA’s June production forecasts overdone for Canada, Europe and the Black Sea Region and the world wheat production forecast released in the June of 668.5 million metric ton is likely to be revised lower in coming months as production estimates become more certain. Rabobank has lowered its world wheat production forecast for the 2010/11 season to 660 million metric tons, down 3% from last year,” he reports.
“Wheat markets have reacted sharply to these recent production setbacks, particularly the significant production revisions to Canadian spring wheat production. Unsurprisingly, Minneapolis wheat exchange prices—which are most exposed to Canadian spring wheat—have reacted even most sharply,” he notes.
“The rally in wheat markets over the past week will be causing some concern amongst speculators, who have built up a significant net short position of about 11% of total open interest,” says Chandler (see chart). “Further rallies in wheat in coming weeks may force speculators out of their short positions, resulting in a short covering rally and causing a spike in prices, similar to that witnessed in May 2009.”
In the end, however, world stocks of wheat will be adequate.
Take home: (1) Watch for USDA to lower production estimates. (2) A short-term rally may offer pricing opportunities. (3) Producers with high-protein wheat may see good premiums.